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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K/A
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED JUNE 28, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 0-24884
CANNONDALE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 06-0871823
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
9 BROOKSIDE PLACE, 06829-0122
GEORGETOWN, CONNECTICUT (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
Registrant's telephone number, including area code:
(203) 544-9800
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS: ON WHICH REGISTERED
- ------------------------------------------------------------------------------------------------
None N/A
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01
Indicate by check mark whether registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definite proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
At September 19, 1997, the aggregate market value of the voting stock held
by non-affiliates of registrant was $165,707,808 based on the per share closing
price on such date, and registrant had 8,670,386 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of registrant's definitive Proxy Statement relating to the 1997
Annual Meeting of Stockholders are incorporated by reference into Part III, as
set forth herein.
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PART I
ITEM 1. BUSINESS.
GENERAL
Cannondale Corporation ("Cannondale" or the "Company") is a leading
manufacturer of high performance bicycles. The Company's bicycle line has grown
from 21 models in its 1992 model year to 59 models in its 1998 model year, the
significant majority of which are hand assembled and constructed with hand
welded aluminum frames. Cannondale also manufactures and sells bicycle
accessories, which include clothing, shoes and bags, a line of components and
bike trailers, and beginning in 1998, wheelchairs. The Company was incorporated
in Delaware in 1971.
The Company has experienced rapid growth, with net sales increasing from
$54.5 million in fiscal 1991 to $162.5 million in fiscal 1997. The Company
believes that the growth in cycling in general, and mountain biking in
particular, have contributed to its growth. Industry sources estimate that
mountain bikes accounted for 67 percent of all bicycle revenue in the United
States in 1996. Based on data from the Bicycle Wholesale Distributors
Association, the high performance segment of the bicycle market has grown more
rapidly than the market as a whole in recent years, based primarily on increases
in average selling prices, which the Company believes is due in large part to
innovations such as lighter weight frames and suspension systems.
PRODUCTS
The Company's bicycles are marketed under the Cannondale brand name and
"Handmade in USA" logo. The Company's 1998 bicycle line offers 59 models, the
vast majority of which feature a Cannondale lightweight aluminum frame.
Cannondale's use of aluminum allows it to produce frames that are generally
lighter in weight than steel frames. Cannondale bicycles employ wide diameter
tubing, which provides greater frame rigidity as well as a distinctive look.
Certain Cannondale models also have full or front suspension systems, offering
greater comfort and control than non-suspended bikes.
The Company recently introduced Seated-Sports Technology, its line of
wheelchairs for distribution in 1998. The wheelchairs feature a lightweight
aluminum frame made of large diameter tubing. The Seated-Sports Technology line
uses the same production facilities as the Company's bicycles, therefore, the
capital requirements to manufacture this new product line are minimal. The
Company's wheelchair line will feature models that include road racing,
everyday, hand-cycles, basketball and outdoor-access chairs.
In June 1997, the Company began shipment of the Raven, a new high
performance, full suspension mountain bike. A product of the Company's ongoing
research and development, the Raven's frame is composed of lightweight carbon
fiber skins bonded to an aluminum spine, providing an even lighter frame weight
than its steel and aluminum counterparts.
There are five major categories of bicycles sold in the adult market:
mountain, road racing, hybrid, touring and specialty. Mountain bikes have wide
knobby tires, straight handlebars and are designed to handle off-road
conditions. Road racing bikes are lightweight with thin tires and drop (curved)
handlebars. Hybrid bikes have the straight handlebars and more upright riding
position of mountain bikes, but use thinner tires, making them suited for on-and
off-road use. Touring bikes are similar to road racing bikes in appearance, but
the frames are designed to carry packs and other touring supplies. The specialty
bicycle market encompasses various niche products, including tandem, multi-sport
and cyclocross bikes.
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The 59 bicycle models in Cannondale's 1998 model year are distributed in
the five major bicycle categories as follows:
NUMBER OF
CATEGORY 1998 MODELS
---------------------------------------------------- -----------
Mountain Bikes:
Full Suspension................................... 11
Front Suspension.................................. 8
Non-Suspended..................................... 7
Road Bikes:
Front Suspension.................................. 2
Non-Suspended..................................... 10
Hybrid.............................................. 8 (four front suspension)
Touring............................................. 4 (one front suspension)
Specialty:
Tandem............................................ 4 (one front suspension)
Multi-Sport....................................... 3 (one front suspension)
Cyclocross........................................ 2 (one front suspension)
The Company's 1998 line of proprietary HeadShok front suspension forks
features a total of eight models. Each HeadShok model offers the Company an
important point of differentiation from other bicycle manufacturers, virtually
all of whose suspension bikes feature the same brand-name forks produced by one
of two independent suppliers. In the 1998 model year there are two HeadShok fork
models that can be mounted to non-Cannondale frames; prior to 1996, all HeadShok
forks functioned with the bicycle's frame as part of an integrated system.
Like the HeadShok forks, the Company's use of its own CODA brand components
on its bicycles helps distinguish its models from those of its competitors. The
Company currently offers cranksets (chain rings), pedals, hubs, wheels, brakes,
handlebars, handlebar grips and stems, saddles, kickstands and certain other
components under the CODA brand name. In addition to providing value-added
features exclusive to Cannondale's bicycles, CODA components also provide
revenues from aftermarket retail sales.
In addition to its bicycle, suspension fork and component lines, the
Company manufactures and sells bicycle accessories, including bags, shoes,
apparel and other accessories, some of which are manufactured for the Company by
third parties. These products are sold primarily through the same distribution
channels as the Company's bicycles, forks and components.
MARKETING
The goal of the Company's sales and marketing program is to establish
Cannondale as the leading high performance bicycle brand in the specialty
bicycle retail channel. The marketing effort is focused on innovation,
differentiation, performance and quality leadership; publicity generated from
the Company-sponsored professional athletes; and a media campaign designed to
attract consumers to specialty bicycle retailers.
Since 1994, the Volvo/Cannondale mountain bike racing team has made
contributions to the product development effort of the Company and served as a
major focus of the Company's marketing effort. The Company is leveraging the
competitive success of the racing team by using photo images of the athletes in
print media, on point-of-sale literature, banners, product packaging and product
catalogs. The Company also supports racing programs in other cycling areas,
including the New Balance/Cannondale triathlon racing team and the Saeco
professional road cycling team.
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The Company's sponsorship of the Saeco team is designed to increase
Cannondale's visibility and credibility among the high-end consumers dedicated
to road racing. A major force in the Giro d'Italia, Tour de France, CoreStates
and other top professional road cycling events, the Saeco team began to compete
aboard Cannondale bicycles, and in the Company's cycling apparel, in the spring
of 1997.
The Company has historically maintained an active program to generate
publicity regarding its products in a variety of print and broadcast media, both
enthusiast and general interest. The public relations effort has been
supplemented by the Company's advertising program, which is primarily directed
to the enthusiast press, although the Company also advertises in more general
lifestyle publications targeting the upscale adult market with interests in
outdoor and leisure activities.
The Company has also made use of the internet to promote its brand and
image, offering consumers a website (http://www.cannondale.com), which is
currently averaging more than one million hits per month.
SALES AND DISTRIBUTION
Cannondale's distribution strategy is to sell its bicycles through
specialty bicycle retailers who it believes have the ability to provide
knowledgeable sales assistance regarding the technical and performance
characteristics of its products and to provide an ongoing commitment to service
its bicycles. In 1998, to increase the sales of its clothing and accessory
lines, the Company will expand its distribution network to include
sport-specialty retailers. The Seated-Sports Technology line primarily will be
sold through the same specialty bicycle retailer network as the Company's
bicycles. The Company does not sell bicycles through mass merchandisers. A key
aspect of the Company's strategy is to align itself with a network of specialty
bicycle retailers that can support the Company's growth objectives. When adding
new retailers, the Company takes into account a number of factors, including the
targeting of certain market areas determined by analyzing various population,
demographic and competitive characteristics.
In the United States and Canada, the Company currently sells bicycles and
accessories directly to approximately 1,300 specialty bicycle retailer locations
and sells accessories through an additional 400 retailer locations. Generally,
the Company's retailers do not have exclusive rights in any territory. For 1998,
in addition to a 37 member field-sales force dedicated to selling bicycles and
launching the Seated-Sports Technology line, the Company has added a new 17
member field-sales force whose focus it is to sell the clothing, accessory, CODA
and HeadShok lines offered by the Company. The Company's 54 member field-sales
force contributes to all aspects of customer service, including; marketing the
Company's products to retailers, providing retailer assistance and assisting in
the Company's accounts receivable management. The account managers also monitor
retail sales at the retailer level, enabling the Company to better respond to
changes in market demand and to adjust production accordingly
Substantially all of Cannondale's domestic bicycle retailers participate in
the Authorized Retailer Program ("ARP"), in which they place orders for the year
and agree to take delivery at predetermined points throughout the year. This
program enables retailers to plan their business around the scheduled deliveries
and provides freight and pricing discounts, as well as payment terms that
generally vary from 30 to 180 days from the date of shipment, depending on the
time of year and other factors. Generally, retailers can place additional orders
during the year and can adjust their original ARP order as their sales warrant.
In addition, the ARP provides the Company with a valuable production planning
tool and helps to balance the production schedule. Historically, the Company has
received a substantial portion of its orders for the year under the ARP during
the first and second fiscal quarters. Orders may be canceled by the retailers
without penalty up to 30 days before shipment.
INTERNATIONAL OPERATIONS
The Company's products are sold in over 60 foreign countries. The Company's
activities in Europe, Japan and Australia are conducted through three
wholly-owned subsidiaries, Cannondale Europe B.V., Cannondale Japan KK and
Cannondale Australia Pty Limited, respectively. Sales in other foreign countries
are made by the Company from the United States, through the use of 44 foreign
distributors, who sell the Company's products to approximately 680 specialty
bicycle retailers overseas. During fiscal 1997, 1996 and 1995,
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Cannondale Europe accounted for 41, 37 and 35 percent, respectively, of
consolidated net sales, Cannondale Japan accounted for 5, 6 and 6 percent
respectively. Cannondale Australia, which was formed in fiscal 1997, accounted
for 1 percent of consolidated net sales in 1997.
Cannondale Europe. Cannondale Europe B.V., based in Oldenzaal, the
Netherlands, was formed in 1989. Cannondale Europe assembles bicycles at its
Netherlands facilities, using frames and components manufactured by the Company
as well as components manufactured by third parties. Cannondale Europe sells
bicycles and accessories directly to approximately 1,300 specialty bicycle
retailers in Austria, Belgium, Denmark, Finland, France, Germany, Italy, the
Netherlands, Norway, Spain, Sweden, Switzerland and the United Kingdom, using
locally based employee account managers supervised from the Oldenzaal
headquarters. Distributors are used in Greece, Hungary, Poland, Portugal,
Turkey, Russia and four republics comprising portions of former Czechoslovakia
and Yugoslavia.
Cannondale Japan. The Company formed Cannondale Japan in fiscal 1992 to
undertake direct sales to Japanese specialty bicycle retailers. Cannondale
Japan, based in Osaka, imports fully assembled bicycles and a full line of
accessories from the Company and various components manufactured by third
parties. Cannondale Japan sells bicycles and accessories directly to
approximately 300 specialty retailers and sells only accessories to an
additional 25 retailers. Cannondale Japan also sells accessories to a Japanese
distributor which in turn sells to approximately 200 additional retailers.
Cannondale Australia. In July 1996, Cannondale Australia Pty Limited
("Cannondale Australia"), a newly formed subsidiary of the Company, purchased
substantially all the assets of Beaushan Trading Pty Limited, an Australian
bicycle distribution company, to undertake direct sales to Australian specialty
bicycle retailers. Cannondale Australia, based in Sydney, imports fully
assembled bicycles and a full line of accessories from the Company and various
components manufactured by third parties. Cannondale Australia sells bicycles
and accessories directly to approximately 110 specialty retailers.
SUPPLIERS
Aluminum tubing, the primary material employed in the Company's
manufacturing operations, is available from a number of domestic suppliers. The
Company currently has a supply agreement for aluminum tubing expiring December
31, 1998, with an option to extend the agreement for up to six months for
certain products subject to a maximum price increase of 4%. The Company believes
that the termination of its current agreement would not have a significant
impact on the availability of aluminum tubing. Cannondale purchases most of its
components from Japanese, Taiwanese and United States OEM suppliers. Purchases
from Japanese component manufacturers are made through Cannondale Japan. The
Company's largest component supplier is Shimano, which was the source of
approximately 19 percent of the Company's total inventory purchases in fiscal
1997. The Company has few long-term agreements with its major component
manufacturers, and has no long-term agreement with Shimano. Although the Company
believes it has established close relationships with the principal suppliers of
these components, the Company's future success will depend upon its ability to
maintain such relationships, which may be terminated by such suppliers on short
notice, or to substitute new suppliers without interruption of supply.
PATENTS AND TRADEMARKS
The Company holds 49 United States patents relating to various products,
processes or designs with expiration dates ranging from 1997 to 2015. The
Company focuses its attention in this area on obtaining patent protection for
the Company's core technologies and seeks broad coverage to protect its position
in the industry. The Company believes that its patented technology is a
reflection of its success in product innovation and that, collectively, its
patents enhance its ability to compete. However, in light of the nature of
innovation in the bicycle industry, the Company does not believe that the loss
of any one of its patents, or the expiration of any of its current patents,
would have a material adverse effect on the Company's business or results of
operations.
The Company holds numerous United States trademarks, covering the
CANNONDALE, CODA and HeadShok names and the names of a variety of products and
components. The CANNONDALE and CODA trademarks are also registered in
Cannondale's significant foreign markets. The Company believes its
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CANNONDALE trademarks have strong brand name recognition in the bicycle and
accessory markets, which the Company believes is a significant competitive
factor.
SEASONALITY
The Company's business is highly seasonal due to consumer spending
patterns, which in turn affect retailer delivery preferences, traditionally
resulting in significantly stronger operating results in the third and fourth
fiscal quarters (January through June). See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Selected Quarterly
Financial Data; Seasonality."
COMPETITION
Competition in the high performance segment of the bicycle industry is
based primarily on perceived value, brand image, performance features, product
innovation and price. Competition in foreign markets may also be affected by
duties, tariffs, taxes and the effect of various trade agreements, import
restrictions and exchange rates. The worldwide market for bicycles and
accessories is extremely competitive, and the Company faces competition from a
number of manufacturers in each of its product lines. A number of the Company's
competitors are larger and have greater resources than the Company. The Company
competes on the basis of the breadth and quality of its product line, the
development of an effective specialty retailer network and its brand
recognition.
RESEARCH AND DEVELOPMENT
Cannondale's product development is directed at making bicycles lighter,
stronger, faster and more comfortable. It is the objective of the research and
development group, with the assistance of the Company's race teams, and in
particular the Volvo/Cannondale mountain bike racing team, which provide
significant feedback from the field, to design and deliver innovative products
to further the Company's efforts to position itself as an innovation leader. The
Company's research and development efforts have resulted in design and
production systems that allow the Company to compress the time between concept
and production. The Company believes that its research and development efforts
have benefited from efficiencies realized through the use of computer-aided
design tools and increased integration of the design and production processes.
In addition, the Company's collaboration with the Volvo/Cannondale mountain bike
racing team has led to the development of several competitive new products,
including the electronic active damper, the Free-Ride fork and the Moto 150
downhill fork, as well as refinement of the Company's existing products. These
developments, together with the development of the Raven and the Seated-Sports
Technology line, exemplify the commitment by the Company to continue to invest
in developing design, product and process technologies. The Company invested
$3.6 million, $2.8 million and $1.8 million on research and development during
fiscal years 1997, 1996 and 1995, respectively.
ENVIRONMENTAL MATTERS
The Company is subject to all applicable federal, state and local laws and
regulations relating to the discharge of materials into the environment, or
otherwise relating to the protection of the environment. The Company does not
believe that compliance with these regulations has an adverse effect upon its
business.
A portion of the Company's Bedford, Pennsylvania property acquired in 1992
was the subject of a groundwater monitoring program, stemming from the removal,
prior to Cannondale's acquisition of the property, of certain underground
storage tanks. The Company received a waiver from the Department of
Environmental Protection that provided for the cessation of this program. During
the program, no groundwater contamination was indicated in the sampling results.
In the unanticipated event that the situation surrounding this matter could
change, and conditions requiring remediation were discovered, the costs of such
remediation could have a material adverse effect on the Company's financial
condition.
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EMPLOYEES
As of June 28, 1997, the Company employed a total of 762 full time
employees in the United States, Cannondale Europe employed 128 full time
employees, Cannondale Japan employed 20 full time employees, and Cannondale
Australia employed 6 full time employees.
FINANCIAL INFORMATION RELATING TO FOREIGN AND DOMESTIC OPERATIONS AND EXPORT
SALES
Please refer to Note 13 of the Notes to Consolidated Financial Statements
appearing elsewhere in this Form 10-K/A.
ITEM 2. PROPERTIES.
The Company's headquarters are currently located in Georgetown,
Connecticut. In 1997, the Company sold the existing headquarters facility for
approximately $1.7 million, purchased land, and is in the process of
constructing a new corporate headquarters and research and development facility,
located approximately 10 miles from the existing headquarters. The existing
headquarters contain 15,900 square feet on a three-acre site. The facility
houses senior corporate management; financial and accounting staffs; marketing
and sales; design and research and development; management information systems
and purchasing. In connection with the construction of a new corporate
headquarters and research and development facility, the Company will continue to
occupy the existing facility on a month-to-month lease pending its relocation
into the new headquarters. The Company anticipates that it will move to the new
headquarters by the end of 1997. The Company anticipates that the cost of the
new facility (approximately $3.9 million) will be paid for with the proceeds
from the sale of the existing headquarters, proceeds of a loan from the
Connecticut Development Authority ("CDA") and borrowings under the Company's
current credit facilities.
Cannondale has manufacturing facilities in Bedford, Pennsylvania and
Philipsburg, Pennsylvania. The Bedford plant contains 125,000 square feet on 23
acres and is the main production facility for bicycles and clothing, and also
houses customer service. The Philipsburg plant consists of 40,000 square feet on
12 acres and houses the production of accessories, some clothing and bike
sub-assemblies. In connection with the financing of the facilities, the sites
are held in the names of local development agencies and are occupied by the
Company pursuant to installment sales agreements. The Company makes monthly
payments which will fully amortize the financing from the local agencies and
additional financing provided by the Pennsylvania Industrial Development
Authority ("PIDA"). Upon final amortization (2009 for Bedford, 2010 for
Philipsburg), title to the properties will be conveyed to the Company and PIDA's
mortgages on the properties will be released. The Company is currently
constructing an addition to the Bedford facility of up to 40,000 square feet.
The additional space will be used for warehousing and expanded production. The
project is expected to cost approximately $5.4 million, of which approximately
40% will be financed by the same agencies which have previously provided
financing for the Bedford facility.
Cannondale Europe owns a 54,200 square foot facility in Oldenzaal, the
Netherlands, which houses administrative and sales offices, a bicycle assembly
plant and warehouse. Cannondale Europe's property provides additional space for
further expansion. Cannondale Japan and Cannondale Australia lease a total of
5,940 and 2,500 square feet of office and warehouse space, respectively.
The Company believes that its present facilities are in good condition and,
upon completion of the planned construction projects, will be suitable for the
Company's operations and will provide sufficient capacity to meet the Company's
anticipated requirements for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS.
The Company currently and from time to time is involved in product
liability lawsuits and other litigation incidental to the conduct of its
business. The Company is not a party to any lawsuit or proceeding that, in the
opinion of management, is likely to have a material adverse effect on the
results of operations, cash flow or financial condition of the Company.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of stockholders of the Company during
the fourth quarter of the Company's 1997 fiscal year.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information concerning executive
officers and other key members of management of the Company.
NAME AGE POSITION
- ------------------------------ --- ------------------------------------------------------
Joseph S. Montgomery.......... 56 Chairman, President, Chief Executive Officer, Director
William A. Luca............... 54 Vice President of Finance, Treasurer, Chief Financial
Officer, Director
Richard J. Resch.............. 54 Vice President of Technology Development, Director
Daniel C. Alloway............. 37 Vice President of Sales -- United States, Vice
President of European Operations
Leonard J. Konecny............ 54 Vice President of Purchasing
John P. Moriarty.............. 53 Assistant Treasurer, Director of Accounting
Mario M. Galasso.............. 31 Vice President of Product Development
Joseph S. Montgomery founded Cannondale in 1971 and has been its Chairman,
President and Chief Executive Officer and a director since its formation. Mr.
Montgomery is the father of James Scott Montgomery, who is also a director of
the Company.
William A. Luca joined Cannondale in January 1994 as Vice President of
Finance, Treasurer and Chief Financial Officer. Prior to joining the Company he
served as a management consultant from 1989 to 1993, including consulting for
the Company between August and December 1993. Mr. Luca was appointed a director
of the Company in August 1994.
Richard J. Resch joined Cannondale in 1988 as Director of Manufacturing. He
subsequently served as Vice President of Operations and from 1991 to the present
has been Vice President for Technology Development. He has been a director of
the Company since February 1990.
Daniel C. Alloway has held a number of positions since joining Cannondale
in 1982, including Vice President of Sales -- United States and Vice President
of European Operations (March 1994 to the present), Managing Director of
Cannondale Europe (1992 to 1994), Director of Sales and Marketing (1990 to 1992)
and National Sales Manager (1987 to 1990).
Leonard J. Konecny joined Cannondale in 1994 as Vice President of
Purchasing. From 1988 to 1994 he was Director of Materials for General Signal
Building Systems (Dual-Lite and Edwards divisions), responsible for the
materials and purchasing functions.
John P. Moriarty joined Cannondale in 1993 as Assistant Treasurer and
Director of Accounting. From 1990 to 1993 he was Controller of Cuno, Inc., a
manufacturer of fluid filtration products. Between 1981 and 1989 he was employed
by Dual-Lite, Inc., as Vice President -- Finance (1983 to 1989) and Controller
(1981 to 1983).
Mario M. Galasso joined Cannondale in 1991 as a Project Engineer. He served
as the Manager of Research and Development from 1994 to 1996. Mr. Galasso
currently serves as the Vice President of Product Development.
Each of the officers of the Company is appointed by and serves at the
pleasure of the Board of Directors.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Company's Common Stock began trading on the Nasdaq National Market on
November 16, 1994, under the symbol BIKE. The following table sets forth for the
periods indicated the high and low sale prices per share for the Common Stock.
HIGH LOW
------ ------
FISCAL 1996
First Quarter (7/2/95 to 9/30/95).................................. 19.50 13.25
Second Quarter (10/1/95 to 12/30/95)............................... 17.63 13.50
Third Quarter (12/31/95 to 3/30/96)................................ 18.75 13.75
Fourth Quarter (3/31/96 to 6/29/96)................................ 25.75 17.75
FISCAL 1997
First Quarter (6/30/96 to 9/28/96)................................. 23.75 17.63
Second Quarter (9/29/96 to 12/28/96)............................... 25.75 17.75
Third Quarter (12/29/96 to 3/29/97)................................ 27.25 17.50
Fourth Quarter (3/30/97 to 6/28/97)................................ 22.25 15.00
As of September 19, 1997, there were approximately 263 stockholders of
record of the Common Stock, excluding beneficial owners holding shares through
nominee names. Based on information available to it, the Company believes it had
more than 5,500 beneficial owners of its Common Stock as of such date.
The Company has not paid any cash dividends on its Common Stock during the
last two fiscal years and does not anticipate paying any cash dividends in the
foreseeable future.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The following selected historical statement of operations data and balance
sheet data have been derived from the Consolidated Financial Statements of the
Company, some of which are presented herein. The information set forth below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Conditions and Results of Operations" and the Consolidated Financial
Statements and related Notes appearing elsewhere in this Form 10-K/A.
TWELVE MONTHS TWELVE MONTHS TWELVE MONTHS TWELVE MONTHS TEN MONTHS
ENDED JUNE 28, ENDED JUNE 29, ENDED JULY 1, ENDED JULY 2, ENDED JULY 3,
1997 1996 1995 1994 1993(6)
-------------- -------------- ------------- ------------- -------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net sales................................ $162,496 $145,976 $ 122,081 $ 102,084 $80,835
Cost of sales............................ 101,334 92,804 79,816 72,083 59,429
-------- -------- --------- --------- -------
Gross profit............................. 61,162 53,172 42,265 30,001 21,406
-------- -------- --------- --------- -------
Expenses:
Selling, general and administrative.... 35,707 32,577 27,023 22,290 19,615
Research and development............... 3,576 2,837 1,751 1,317 1,105
Stock option compensation.............. -- -- -- 2,046 --
Agent and distributor termination
costs................................ -- -- -- -- 271
-------- -------- --------- --------- -------
Total operating expenses................. 39,283 35,414 28,774 25,653 20,991
-------- -------- --------- --------- -------
Operating income......................... 21,879 17,758 13,491 4,348 415
-------- -------- --------- --------- -------
Other income (expense):
Interest expense....................... (1,574) (2,224) (3,929) (4,460) (4,177)
Other income........................... 843 414 24 324 828
-------- -------- --------- --------- -------
Total other income (expense)............. (731) (1,810) (3,905) (4,136) (3,349)
-------- -------- --------- --------- -------
Income (loss) before income taxes and
extraordinary item..................... 21,148 15,948 9,586 212 (2,934)
Income tax expense....................... (7,642) (5,802) (1,353) (791) (179)
-------- -------- --------- --------- -------
Income (loss) before extraordinary
item................................... 13,506 10,146 8,233 (579) (3,113)
Extraordinary item, net of income
taxes(1)............................... -- -- (685) -- (464)
-------- -------- --------- --------- -------
Net income (loss)........................ 13,506 10,146 7,548 (579) (3,577)
Accumulated preferred stock
dividends(2)........................... -- -- (400) (1,008) --
-------- -------- --------- --------- -------
Income (loss) applicable to common shares
and equivalents........................ $ 13,506 $ 10,146 $ 7,148 $ (1,587) $(3,577)
======== ======== ========= ========= =======
PER COMMON SHARE:
Income (loss) before extraordinary
item(3)................................ $ 1.51 $ 1.18 $ 1.18 $ (.37) $ (.73)
Net income (loss)........................ $ 1.51 $ 1.18 $ 1.08 $ (.37) $ (.83)
Weighted average common shares and common
equivalent shares outstanding(4)....... 8,916 8,597 6,606 4,246 4,291
JUNE 28, JUNE 29, JULY 1, JULY 2, JULY 3,
1997 1996 1995(5) 1994 1993
-------------- -------------- ------------- ------------- -------------
BALANCE SHEET DATA:
Working capital.......................... $ 77,196 $ 62,032 $ 40,304 $ 6,366 $ 6,107
Total assets............................. 127,284 109,945 84,008 67,870 65,245
Subordinated debt........................ -- -- -- 9,179 9,323
Total long-term debt and subordinated
debt, excluding current portion........ 20,319 13,114 23,593 16,174 17,195
Preferred stock.......................... -- -- -- 6,718 6,718
Total stockholders' equity, including
preferred stock........................ 81,621 68,294 36,088 9,640 8,220
- ---------------
(1) Extraordinary items consist of the costs relating to early extinguishment of
debt, net of applicable tax benefit, if any.
(2) Reflects preferred stock dividends accumulated during the fiscal period. All
cumulative preferred stock dividends were paid in fiscal 1995 at the time of
the redemption of the preferred stock in connection with the Company's
initial public offering.
(3) No cash dividends were declared or paid on the Common Stock during any of
these periods.
(4) Shares underlying options granted during fiscal 1994, despite being
antidilutive, are treated as outstanding for fiscal 1994 and all prior
periods, using the treasury stock method in accordance with Staff Accounting
Bulletin 83 of the Securities and Exchange Commission. Weighted average
number of shares outstanding in fiscal 1995 reflects the issuance of
2,300,000 shares of Common Stock in connection with the Company's initial
public offering. Weighted average number of shares outstanding in 1996
reflects the issuance of 1,366,666 shares of common stock in connection with
a public offering in fiscal 1996.
(5) Certain fiscal 1995 amounts have been reclassified to conform to the fiscal
1997 presentation.
(6) In 1993, the Company changed its fiscal year to the Saturday closest to June
30th.
9
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
The following table sets forth selected statement of earnings data
expressed as a percentage of net sales.
FISCAL
-------------------------
1997 1996 1995
----- ----- -----
Net sales........................................................... 100.0% 100.0% 100.0%
Cost of sales....................................................... 62.4 63.6 65.4
----- ----- -----
Gross profit........................................................ 37.6 36.4 34.6
----- ----- -----
Expenses:
Selling, general and administrative............................... 22.0 22.3 22.1
Research and development.......................................... 2.2 1.9 1.4
----- ----- -----
Total operating expenses............................................ 24.2 24.2 23.5
----- ----- -----
Operating income.................................................... 13.4 12.2 11.1
----- ----- -----
Other income (expense):
Interest expense.................................................. (1.0) (1.5) (3.2)
Other income...................................................... 0.5 0.3 --
----- ----- -----
Total other income (expense)........................................ (0.5) (1.2) (3.2)
----- ----- -----
Income before income taxes and extraordinary item................... 12.9 11.0 7.9
Income tax expense.................................................. (4.7) (4.0) (1.1)
----- ----- -----
Income before extraordinary item.................................... 8.2.. 7.0 6.8
Extraordinary item, net of income taxes............................. -- -- (0.6)
----- ----- -----
Net income.......................................................... 8.2% 7.0% 6.2%
===== ===== =====
COMPARISON OF FISCAL 1997, 1996 AND 1995
Net Sales. Net sales increased to $162.5 million in fiscal 1997, from
$146.0 million in 1996 and $122.1 million in 1995. The increase in net sales
over these periods is primarily due to expansion of the Company's specialty
bicycle retailer network and growth in sales to existing specialty retailers.
Over the last three years, the number of specialty retailer locations has
increased to over 3,700 at the end of fiscal 1997 from approximately 3,400 at
the end of 1995. The increase in sales to existing specialty retailers is
attributable to the increase in the number of bicycle models offered from 50
models in fiscal 1995, to 57 models in 1997, as well as an increase in clothing
sales and proprietary aftermarket componentry sold under the CODA and HeadShok
brand names. The increase in sales in fiscal 1997 was offset by the effect of a
stronger U.S. dollar relative to the Dutch guilder and Japanese yen compared to
the prior-year periods. Net sales reported by Cannondale USA were $85.5 million
in fiscal 1997, $83.2 million in fiscal 1996 and $71.7 million in 1995. Net
sales reported by Cannondale Europe increased to $67.0 million in fiscal 1997,
from $53.6 million in fiscal 1996 and $42.5 million in 1995. The Company
attributes this growth primarily to increased sales to existing foreign
retailers and increased sales in non-bike categories. Net sales of Cannondale
Japan decreased to $7.9 million in fiscal 1997 from $9.2 million in fiscal 1996,
and were the same as the $7.9 million in 1995. The majority of the decrease in
sales by Cannondale Japan during fiscal 1997 is attributable to the strength of
the U.S. dollar compared to the Japanese yen during fiscal 1997. Net sales of
Cannondale Australia were $2.1 million in fiscal 1997. Based on the Company's
relative market share within the domestic and international markets, management
anticipates that international sales will continue to increase as a percentage
of total sales in the future.
Gross Profits. Gross profit as a percentage of net sales has increased to
37.6% in fiscal 1997, from 36.4% in 1996 and 34.6% in 1995. The improved gross
margin reflects a more favorable product mix, with higher-end, higher-margin
full suspension bicycles representing a larger portion of overall sales, growth
in the Company's
10
12
international markets, cost-reduction programs and the Company's continued
integration of proprietary technology through the use of Cannondale bicycle
frames, CODA components and HeadShok suspension systems.
Operating Expenses. Selling, general and administrative expenses increased
to $35.7 million in fiscal 1997, from $32.6 million in fiscal 1996 and $27.0
million in 1995. Increases in selling, general and administrative expenses are
directly associated with the increased sales, and additional personnel,
advertising and marketing costs required to support the Company's growth. As a
percentage of net sales, selling, general and administrative expenses remained
fairly constant at 22.0%, 22.3% and 22.1% in fiscal 1997, 1996 and 1995,
respectively.
Research and development expenses have increased to $3.6 million in fiscal
1997, from $2.8 million in fiscal 1996 and $1.8 million in 1995, reflecting the
Company's commitment to improvement of its current products and the generation
of new products and manufacturing processes. The increase in spending during
fiscal 1997 was primarily attributable to the expansion of the Company's product
lines: the development of the Raven manufacturing process, the product and
process development of the Seated-Sports Technology line and expansion of the
CODA components product line. In addition, the Company has continued to
integrate the Volvo/Cannondale mountain bike racing team into its research and
development efforts, allowing regular testing of both prototype and finished
production models.
Interest Expense. Interest expense decreased to $1.6 million in fiscal
1997, from $2.2 million in 1996 and $3.9 million in 1995, due to lower borrowing
levels resulting from repayment of debt with the net proceeds of the Company's
initial public offering of Common Stock in November 1994 and a second offering
in September 1995. The decrease in interest expense also reflects the lower
interest rates negotiated as a result of the Company's improved performance and
capitalization. In addition, during fiscal 1997, a portion of the Company's
outstanding borrowings were denominated in Dutch guilders and Japanese yen,
which offered significantly lower borrowing rates than U.S. dollar borrowings.
Other Income (Expense). Other income (expense) primarily consists of
finance charges relating to accounts receivable, which totaled $810,000,
$552,000 and $295,000 for fiscal 1997, 1996 and 1995, respectively. The
remaining balance consists primarily of foreign currency gains (losses) of
$33,000, ($138,000), and ($271,000) for fiscal 1997, 1996 and 1995,
respectively.
Income Tax Expense. Income tax expense increased to $7.6 million in fiscal
1997, from $5.8 million in fiscal 1996, and $1.4 million in 1995, which reflects
the Company's increasing profitability. In fiscal 1995, income tax expense was
affected by a $3.0 million reduction in the valuation allowance previously
provided against the Company's net deferred tax assets. In accordance with FASB
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," net deferred tax assets are not recognized when a company has cumulative
losses in recent years. However, as a result of its continued profitability, the
Company believes it is more likely than not that U.S. operations will generate
sufficient taxable income to realize the benefits of these deferred tax assets.
See Note 5 of Notes to Consolidated Financial Statements.
11
13
SELECTED QUARTERLY FINANCIAL DATA; SEASONALITY
The following table presents selected unaudited quarterly data for the two
most recent fiscal years. This information has been prepared by the Company on a
basis consistent with the Company's audited consolidated financial statements
and includes all adjustments (consisting of normal recurring accruals) that
management considers necessary for a fair presentation of the results of such
quarters. The operating results for any quarter are not necessarily indicative
of the results for any future period.
FOR THE QUARTER ENDED
---------------------------------------------------------------------------------------------------------
JUNE 28, MARCH 29, DECEMBER 28, SEPTEMBER 28, JUNE 29, MARCH 30, DECEMBER 30, SEPTEMBER 30,
1997 1997 1996 1996 1996 1996 1995 1995
-------- --------- ------------ ------------- -------- --------- ------------ -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales............. $ 42,093 $48,229 $ 41,294 $30,880 $ 39,008 $45,050 $ 35,069 $26,849
Cost of sales......... 26,588 28,698 25,396 20,652 24,645 27,511 21,889 18,759
-------- ------- -------- ------- -------- ------- -------- -------
Gross profit.......... 15,505 19,531 15,898 10,228 14,363 17,539 13,180 8,090
-------- ------- -------- ------- -------- ------- -------- -------
Expenses:
Selling, general and
administrative.... 8,481 9,436 9,451 8,339 8,693 9,233 8,020 6,631
Research and
development....... 968 946 905 757 687 667 828 656
-------- ------- -------- ------- -------- ------- -------- -------
Total operating
expenses............ 9,449 10,382 10,356 9,096 9,380 9,900 8,848 7,287
-------- ------- -------- ------- -------- ------- -------- -------
Operating income...... 6,056 9,149 5,542 1,132 4,983 7,639 4,332 803
Other income
(expense)........... 219 (253) (322) (375) (22) (651) (637) (499)
-------- ------- -------- ------- -------- ------- -------- -------
Income before income
taxes............... 6,275 8,896 5,220 757 4,961 6,988 3,695 304
Income tax expense.... (1,963) (3,344) (2,067) (268) (1,457) (2,764) (1,471) (110)
-------- ------- -------- ------- -------- ------- -------- -------
Net income............ $ 4,312 $ 5,552 $ 3,153 $ 489 $ 3,504 $ 4,224 $ 2,224 $ 194
======== ======= ======== ======= ======== ======= ======== =======
Income per share...... $ .48 $ .62 $ .35 $ .05 $ .39 $ .48 $ .25 $ .03
The Company's results fluctuate from quarter to quarter as a result of a
number of factors, including product mix, the timing and number of new retailer
openings, the timing of shipments and new product introductions, and the effect
of adverse weather conditions on consumer purchases. In addition, the Company's
business is highly seasonal due to consumer spending patterns, which in turn
affect dealer delivery preferences, resulting in more shipments and
significantly stronger results in the third and fourth fiscal quarters (January
through June). The third and fourth fiscal quarters together accounted for 56%
and 57% of the Company's total net sales in fiscal 1997 and 1996, respectively.
Although sales orders are received throughout the course of the year, shipments
are concentrated in the third and fourth fiscal quarters. Beginning in fiscal
1996, in an effort to reduce the seasonality of its shipments and to smooth the
production process, the Company, through its ARP, provided incentives for
retailers to take delivery of a higher percentage of their annual bicycle order
in the first fiscal quarter.
The Company's gross margins fluctuate primarily according to product mix,
the cost of materials and the timing of product price adjustments and markdowns.
Although some operating expenses are variable with sales, most expenses are
incurred evenly throughout the year. As a result, the third and fourth fiscal
quarters accounted for 70% and 71% of the operating income for fiscal 1997 and
1996, respectively. It is unlikely that this seasonal pattern will change
significantly in the future. While the Company was successful in reducing the
impact of the seasonality in the first quarters of fiscal 1997 and 1996,
achieving slightly profitable performance, the Company in the past has incurred,
and may in the future incur, operating losses in the first fiscal quarter, as
the business remains highly seasonal.
12
14
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of working capital used over the past three
years have been borrowings under its revolving credit facilities, and the net
proceeds of the Company's two public offerings, which totaled approximately
$22.1 million in fiscal 1996 and approximately $8.3 million (after repayment of
the subordinated notes and redemption of the preferred stock, including
accumulated dividends) in fiscal 1995.
In June 1997, the Company entered into an unsecured, multicurrency
revolving credit facility which serves as the Company's principal source of
working capital funding. The Company used the proceeds from the multi-currency
revolving credit facility to refinance its domestic revolving line of credit and
domestic term loan. The credit facility, which extends to June 2000, allows the
Company, Cannondale Europe and Cannondale Japan to borrow up to $50,000,000. The
credit facility includes a provision that permits the Company to borrow up to
$7,500,000 on a short-term basis (less than 30 days). The Company has the option
to borrow at the following rates: (1) a variable rate that is defined as the
higher of the bank's prime rate or the Federal Funds Rate plus 50.0 basis
points; (2) a short-term market rate that is an offered rate per annum quoted by
the bank; or (3) the LIBOR (London Interbank Offered Rate) applicable to the
currency borrowed plus an interest rate margin ("LIBOR margin"). The LIBOR
margin (ranging from 30.0 to 75.0 basis points) is determined quarterly based
upon predetermined performance criteria. The Company is obligated to pay a
facility fee (ranging from 15.0 to 25.0 basis points) on the balance of the
facility based on the same performance criteria as the LIBOR margin. As a result
of the seasonality of the Company's business and payment terms, which typically
vary between 30 and 180 days from the date of shipment (depending on time of
year and other factors), borrowings under the Company's and subsidiaries' credit
facilities typically reach their highest level near the end of the third fiscal
quarter and are typically at their lowest level near the end of the first fiscal
quarter. The Company's credit facility contains restrictive and financial
covenants relating to, among other things, the maintenance of minimum levels of
capitalization, interest coverage and tangible net worth. The Company is
currently in compliance with all restrictive and financial covenants.
Cannondale Europe and Cannondale Japan each maintains a separate credit
facility for short-term borrowings. In June 1997, Cannondale Europe entered into
a new multicurrency credit arrangement, which allows Cannondale Europe to borrow
up to $10,000,000 on a short-term basis. The interest rate on outstanding
borrowings is a market rate, applicable to the borrowed currencies, plus 1.5%
with a minimum rate of 3.5%. The credit arrangement contains no specific
expiration date, and may be terminated by either Cannondale Europe or the
lender, at any time. Cannondale Japan has an unsecured revolving credit facility
for up to 155,000,000 Japanese yen (approximately $1.4 million at June 28,
1997). Approximately $200,000 and $800,000 of principal amount was outstanding
under the Dutch and Japanese facilities, respectively, at June 28, 1997. The
Dutch and Japanese facilities are guaranteed by the Company.
Net cash provided by (used in) operating activities was $4.4 million, ($6.8
million), and ($2.0 million) in fiscal 1997, 1996 and 1995, respectively. The
principal uses of cash in operating activities over the three-year period were
to support the increased investment in accounts receivable and inventories
associated with the Company's growth in sales. Cash provided by operating
activities in fiscal 1997 is primarily attributable to the increased
profitability of the Company and leveling of inventory growth compared to the
prior-year period when the Company initiated a strategy to maintain higher
inventory levels to capitalize on its flexible manufacturing capabilities.
Capital expenditures were $9.8 million, $3.0 million and $2.4 million in
fiscal 1997, 1996 and 1995, respectively. In fiscal 1997, the majority of these
expenditures ($5.6 million) related to the construction of a new corporate
headquarters and research and development facility in Bethel, Connecticut
(anticipated total cost of $3.9 million) and the expansion of the Company's
production facility in Bedford, Pennsylvania (anticipated total cost of $5.4
million). The cost of the corporate headquarters and research and development
facility was partially funded with the proceeds from the sale of the Company's
current headquarters facility ($1.7 million), and from CDA financing of up to
$1.6 million. The Company has also received approval from CDA for financing up
to $337,500 for research and development equipment to be acquired in conjunction
with the new facilities. It is expected that 40% of the total cost of the
Bedford plant addition will be financed through the Pennsylvania Industrial
Development Authority at interest rates of approximately 3.75%. The
13
15
Company plans to spend the remaining $3.7 million in fiscal 1998 on these
facilities. The balance of capital expenditures principally represents
investments in manufacturing equipment and facilities to support increases in
production volume.
The Company enters into forward contracts to purchase and sell U.S.,
European, and Japanese currencies to reduce exposures to foreign currency risk.
The Company enters into forward foreign currency contracts for a significant
portion of its current and net balance sheet exposures, principally relating to
trade receivables and payables denominated in foreign currencies, and firm sale
and purchase commitments. The forward exchange contracts generally have
maturities that do not exceed 12 months and require the Company to exchange, at
maturity, various currencies for U.S. dollars, Dutch guilders and Japanese yen
at rates agreed to at inception of the contracts. The Company does not hold
foreign currency forward contracts for trading purposes. Deferred gains and
losses resulting from effective hedges of existing assets, liabilities or firm
commitments are included in prepaid expenses and other current assets and are
recognized when the offsetting gains and losses are recognized on the related
transaction. The net losses explicitly deferred at June 28, 1997 and June 29,
1996, respectively, were not significant. Gains and losses on foreign currency
transactions that do not satisfy the accounting requirements of an effective
hedge are reported currently as other income or expense. See Note 10 of Notes to
Consolidated Financial Statements.
In September 1997, the Company's Board of Directors authorized the
repurchase by the Company of up to 1,000,000 shares of its common stock at an
aggregate price not to exceed $20 million. Purchases by the Company may be made
from time to time in the open market or in private transactions. The repurchase
program may be suspended or discontinued at any time. Shares repurchased by the
Company will be available for general corporate purposes, including issuance
upon exercise of stock options. In order to accommodate the capital requirements
of the repurchase program, in September 1997, the Company and the lender have
agreed to amend the Company's revolving credit facility to allow the Company and
its subsidiaries to borrow up to $70,000,000. The proposed amendment to the
revolving credit facility includes adjustments to specified levels of tangible
net worth and cash flow levels that the Company must maintain.
The Company expects that cash flow generated by its operations and
borrowings under the revolving credit facilities will be sufficient to meet its
planned operating and capital requirements for the foreseeable future.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary data required by Part II, Item
8, are included in Part IV, as indexed at Item 14(a)(1).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
14
16
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by Item 10 regarding directors is incorporated by
reference to the information appearing under the caption "Election of Directors"
in the Company's definitive Proxy Statement relating to its 1997 Annual Meeting
of Stockholders to be filed with the Securities and Exchange Commission within
120 days after the close of its fiscal year. The information required by Item 10
regarding executive officers appears under the caption "Executive Officers of
the Registrant" in Part I.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by Item 11 is incorporated by reference to the
information appearing under the caption "Executive Compensation" in the
Company's definitive Proxy Statement relating to its 1997 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission within 120
days after the close of its fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by Item 12 is incorporated by reference to the
information appearing under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Company's definitive Proxy Statement
relating to its 1997 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission within 120 days after the close of its fiscal
year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Item 13 is incorporated by reference to the
information appearing under the caption "Certain Relationships and Related
Transactions" in the Company's definitive Proxy Statement relating to its 1997
Annual Meeting of Stockholders to be filed with the Securities and Exchange
Commission within 120 days after the close of its fiscal year.
15
17
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(A)(1) FINANCIAL STATEMENTS.
Index to Consolidated Financial Statements
Report of Independent Auditors
Consolidated Balance Sheets as of June 28, 1997 and June 29, 1996
Consolidated Statements of Earnings for the years ended June 28, 1997,
June 29, 1996 and July 1, 1995
Consolidated Statements of Stockholders' Equity for the years ended June
28, 1997, June 29, 1996 and July 1, 1995
Consolidated Statements of Cash Flows for the years ended June 28, 1997,
June 29, 1996 and July 1, 1995
Notes to Consolidated Financial Statements
(A)(2) FINANCIAL STATEMENT SCHEDULE.
Report of Independent Auditors on Financial Statement Schedule
Schedule II -- Valuation and Qualifying Accounts
All other financial statement schedules are omitted because they are not
applicable, or not required, or because the required information is included in
the Consolidated Financial Statements or Notes thereto.
(A)(3) EXHIBITS.
10.1.8 -- $50,000,000 Credit Agreement dated as of June 9, 1997 among the Company, certain
subsidiaries of the Company and NationsBank, N.A. as Administrative Agent,
Fronting Bank and Swingline Bank and ABN Amro Bank N.V., New York Branch, as
Documentation Agent and Syndication Agent.
10.1.9 -- $10,000,000 Umbrella Arrangement Agreement dated May 28, 1997 between Cannondale
Europe, B.V. and ABN Amro Bank N.V., New York Branch.
11 -- Computation of Earnings Per Share.
21 -- Subsidiaries of the Registrant.
23 -- Consent of Independent Auditors.
27 -- Financial Data Schedule.
THE COMPANY UNDERTAKES TO PROVIDE A COPY OF ANY OF THE FOREGOING EXHIBITS
TO ANY COMPANY STOCKHOLDER OF RECORD ON OCTOBER 4, 1997. REQUESTS SHOULD BE MADE
IN WRITING TO THE COMPANY AT 9 BROOKSIDE DRIVE, GEORGETOWN, CONNECTICUT 06829,
ATTN: INVESTOR RELATIONS, AND SHOULD BE ACCOMPANIED BY PAYMENT OF $10.00 PER
EXHIBIT, TO COVER THE COMPANY'S EXPENSES IN PROVIDING SUCH EXHIBIT(S).
(B) REPORTS ON FORM 8-K.
None
16
18
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this amendment to be signed
on its behalf by the undersigned, thereunto duly authorized.
CANNONDALE CORPORATION
October 8, 1997 By: /s/ WILLIAM A. LUCA
------------------------------------
William A. Luca
Vice President of Finance,
Treasurer and Chief Financial
Officer,
17
19
CANNONDALE CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors......................................................... F-2
Consolidated Balance Sheets as of June 28, 1997 and June 29, 1996...................... F-3
Consolidated Statements of Operations for the years ended June 28, 1997, June 29, 1996,
and July 1, 1995..................................................................... F-4
Consolidated Statements of Stockholders' Equity for the years ended June 28, 1997, June
29, 1996, and July 1, 1995........................................................... F-5
Consolidated Statements of Cash Flows for the years ended June 28, 1997, June 29, 1996,
and July 1, 1995..................................................................... F-6
Notes to Consolidated Financial Statements............................................. F-7
F-1
20
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Cannondale Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheets of Cannondale
Corporation and subsidiaries as of June 28, 1997 and June 29, 1996, and the
related consolidated statements of earnings, stockholders' equity, and cash
flows for the years ended June 28, 1997, June 29, 1996 and July 1, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Cannondale
Corporation and subsidiaries at June 28, 1997 and June 29, 1996, and the
consolidated results of their operations and their cash flows for the years
ended June 28, 1997, June 29, 1996 and July 1, 1995, in conformity with
generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Stamford, Connecticut
August 11, 1997
F-2
21
CANNONDALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 28, JUNE 29,
1997 1996
-------- --------
ASSETS
Current assets:
Cash................................................................. $ 5,521 $ 4,305
Trade accounts receivable, less allowances of $6,432 and $5,238...... 61,272 52,027
Inventory............................................................ 30,105 30,526
Deferred income taxes................................................ 2,623 2,041
Prepaid expenses and other current assets............................ 2,386 1,154
-------- --------
Total current assets................................................... 101,907 90,053
Property, plant and equipment.......................................... 23,105 18,527
Other assets........................................................... 2,272 1,365
-------- --------
Total assets........................................................... $127,284 $109,945
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................................... $ 12,330 $ 12,431
Revolving credit advances............................................ 1,022 4,756
Income taxes payable................................................. 2,946 1,845
Other accrued expenses............................................... 3,916 2,942
Accrued warranty expense............................................. 2,085 2,101
Payroll and other employee related benefits.......................... 1,850 2,266
Current installments of long-term debt............................... 562 1,680
-------- --------
Total current liabilities.............................................. 24,711 28,021
Long-term debt, less current installments.............................. 20,319 13,114
Deferred income taxes.................................................. 339 235
Other noncurrent liabilities........................................... 294 281
-------- --------
Total liabilities...................................................... 45,663 41,651
-------- --------
Stockholders' equity:
Common Stock, $.01 par value:
Authorized shares -- 18,000,000
Issued and outstanding shares -- 8,687,615 and 8,611,715.......... 87 86
Additional paid-in capital........................................... 56,860 55,965
Retained earnings.................................................... 26,053 12,547
Cumulative translation adjustment.................................... (1,379) (304)
-------- --------
Total stockholders' equity........................................ 81,621 68,294
-------- --------
Total liabilities and stockholders' equity................... $127,284 $109,945
======== ========
See accompanying notes
F-3
22
CANNONDALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 28, JUNE 29, JULY 1,
1997 1996 1995
---------- ---------- ----------
Net sales................................................ $162,496 $145,976 $122,081
Cost of sales............................................ 101,334 92,804 79,816
-------- -------- --------
Gross profit............................................. 61,162 53,172 42,265
-------- -------- --------
Expenses:
Selling, general and administrative.................... 35,707 32,577 27,023
Research and development............................... 3,576 2,837 1,751
-------- -------- --------
39,283 35,414 28,774
-------- -------- --------
Operating income......................................... 21,879 17,758 13,491
-------- -------- --------
Other income (expense):
Interest expense....................................... (1,574) (2,224) (3,929)
Other income........................................... 843 414 24
-------- -------- --------
(731) (1,810) (3,905)
-------- -------- --------
Income before income taxes and extraordinary item........ 21,148 15,948 9,586
Income tax expense....................................... (7,642) (5,802) (1,353)
-------- -------- --------
Income before extraordinary item......................... 13,506 10,146 8,233
Extraordinary item:
Loss from early extinguishment of debt, net of income
taxes............................................... -- -- (685)
-------- -------- --------
Net income............................................... 13,506 10,146 7,548
Accumulated preferred stock dividends.................... -- -- (400)
-------- -------- --------
Income applicable to common shares and equivalents....... $ 13,506 $ 10,146 $ 7,148
======== ======== ========
Primary income per share:
Income before extraordinary item....................... $ 1.51 $ 1.18 $ 1.18
Extraordinary item..................................... -- -- (.10)
-------- -------- --------
Net income............................................. $ 1.51 $ 1.18 $ 1.08
======== ======== ========
Fully diluted income per share:
Income before extraordinary item....................... $ 1.51 $ 1.17 $ 1.18
Extraordinary item..................................... -- -- (.10)
-------- -------- --------
Net income............................................. $ 1.51 $ 1.17 $ 1.08
======== ======== ========
See accompanying notes
F-4
23
CANNONDALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
SERIES A
PREFERRED STOCK COMMON STOCK ADDITIONAL RETAINED CUMULATIVE
----------------- ------------------ PAID-IN EARNINGS TRANSLATION
SHARES VALUE SHARES VALUE CAPITAL (DEFICIT) ADJUSTMENT TOTAL
------ ------ --------- ----- ---------- -------- ----------- -------
Balance at July 2, 1994.......... 6,718 $6,718 3,843,349 $38 $ 7,874 $(5,147) $ 157 $ 9,640
Net income..................... -- -- -- -- -- 7,548 -- 7,548
Redemption of fractional shares
in connection with stock
split........................ -- -- (16) -- -- -- -- --
Purchase and retirement of
common shares................ -- -- (3,875) -- (3) -- -- (3)
Issuance of common stock (Net
of $3,078 of offering
costs)....................... -- -- 2,300,000 23 26,799 -- -- 26,822
Exercise of warrants........... -- -- 958,261 10 (10) -- -- --
Redemption of Series A
Preferred Stock.............. (6,718) (6,718) -- -- -- -- -- (6,718)
Dividend payment to preferred
stockholders................. -- -- -- -- (1,408) -- -- (1,408)
Exercise of options............ -- -- 29,462 -- 42 -- -- 42
Foreign currency adjustment.... -- -- -- -- -- -- 165 165
------ ------ --------- --- -------- ------- ------- -------
Balance at July 1, 1995.......... -- -- 7,127,181 71 33,294 2,401 322 36,088
Net income..................... -- -- -- -- -- 10,146 -- 10,146
Issuance of common stock (Net
of $1,490 of offering
costs)....................... -- -- 1,366,666 14 22,071 -- -- 22,085
Exercise of options............ -- -- 117,868 1 600 -- -- 601
Foreign currency adjustment.... -- -- -- -- -- -- (626) (626)
------ ------ --------- --- -------- ------- ------- -------
Balance at June 29, 1996......... -- -- 8,611,715 86 55,965 12,547 (304) 68,294
Net income..................... -- -- -- -- -- 13,506 -- 13,506
Exercise of options............ -- -- 75,900 1 895 -- -- 896
Foreign currency adjustment.... -- -- -- -- -- -- (1,075) (1,075)
------ ------ --------- --- -------- ------- ------- -------
Balance at June 28, 1997......... -- $ -- 8,687,615 $87 $ 56,860 $26,053 $(1,379) $81,621
====== ====== ========= === ======== ======= ======= =======
See accompanying notes
F-5
24
CANNONDALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 28, JUNE 29, JULY 1,
1997 1996 1995
---------- ---------- ----------
OPERATING ACTIVITIES
Net income..................................................... $ 13,506 $ 10,146 $ 7,548
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Extraordinary item........................................ -- -- 685
Depreciation and amortization............................. 3,211 2,994 2,740
Provision for bad debt, discount, credit and return and
late charge reserves.................................... 5,762 10,114 3,934
Provision for obsolete inventory.......................... 1,484 883 912
Unrealized (gain) loss on foreign currency transactions... 107 (43) 389
Deferred income taxes..................................... (442) (616) (1,361)
Other..................................................... (1) 31 143
Changes in assets and liabilities:
Trade accounts receivable............................... (17,399) (25,136) (12,680)
Inventory............................................... (1,975) (10,402) (4,749)
Prepaid expenses and other assets....................... (2,316) 174 (1,136)
Accounts payable........................................ 138 3,058 37
Warranty and other accrued expenses..................... 805 323 1,926
Income taxes payable and other liabilities.............. 1,470 1,686 (348)
-------- -------- --------
Net cash provided by (used in) operating activities............ 4,350 (6,788) (1,960)
-------- -------- --------
INVESTING ACTIVITIES
Capital expenditures........................................... (9,766) (3,023) (2,350)
Proceeds from sale of building................................. 1,676 -- --
-------- -------- --------
Net cash used in investing activities.......................... (8,090) (3,023) (2,350)
-------- -------- --------
FINANCING ACTIVITIES
Redemption of subordinated debt................................ -- -- (10,000)
Net proceeds from the issuance of common stock................. 896 22,686 26,864
Redemption of preferred stock.................................. -- -- (6,718)
Dividend payment to preferred stockholders..................... -- -- (1,408)
Proceeds from issuance of long-term debt....................... 21,383 489 --
Purchase and retirement of common shares....................... -- -- (3)
Net proceeds from (repayments of) borrowings under short-term
revolving credit agreements.................................. (3,555) 478 (1,294)
Net repayments of borrowings under long-term debt and capital
lease agreements............................................. (15,133) (11,291) (2,380)
-------- -------- --------
Net cash provided by financing activities...................... 3,591 12,362 5,061
-------- -------- --------
Effect of exchange rate changes on cash........................ 1,365 (501) 147
-------- -------- --------
Net increase in cash........................................... 1,216 2,050 898
Cash at beginning of period.................................... 4,305 2,255 1,357
-------- -------- --------
Cash at end of period.......................................... $ 5,521 $ 4,305 $ 2,255
======== ======== ========
SUPPLEMENTAL DISCLOSURES
Cash paid during the period for:
Interest..................................................... $ 1,781 $ 2,426 $ 3,639
======== ======== ========
Income taxes, net of refunds................................. $ 6,788 $ 4,375 $ 1,940
======== ======== ========
See accompanying notes
F-6
25
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
Description of Business
Cannondale Corporation ("Cannondale U.S.") manufactures and distributes
bicycles and bicycling accessories and equipment. International operations are
conducted through the Company's wholly-owned subsidiaries: Cannondale Europe
B.V. ("Cannondale Europe"), Cannondale Japan KK ("Cannondale Japan") and
Cannondale Australia Pty Limited ("Cannondale Australia").
Business and Credit Concentrations
The Company's customer base is composed of specialty bicycle retailers who
are located principally throughout the United States and Europe. There is no
single geographic area of concentration in the United States or Europe. No
single customer accounted for more than 5% of the Company's sales during the
years ended June 28, 1997, June 29, 1996 or July 1, 1995. As a result of the
seasonality of the Company's business, the payment terms offered to its
customers generally range from 30 to 180 days depending on the time of year and
other factors.
The Company's raw materials are readily available and the Company is not
completely dependent on a single supplier. The Company has, however, preferences
with respect to continuing its relationships with certain selected vendors, and
a material portion of the Company's inventory purchases is from a single
supplier.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Cannondale U.S. and its subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
Revenue Recognition
Sales, net of estimated returns and allowances, are recognized when
products are shipped. Provisions for returns and allowances are determined
principally on the basis of past experience.
Product Warranties
The Company provides original owners of its bicycles with either a one
year, five year or lifetime warranty for the bicycle frame, depending on model
type and a one-year warranty for suspensions and components. During the warranty
period, the Company will repair or replace a defective part or assembly at no
cost to the owner. Provisions for estimated warranty expense are recognized at
the time of sale, determined principally on the basis of past experience.
Inventory
Inventory is stated at the lower of cost (first-in, first-out method) or
market.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Plant and equipment under
capitalized lease obligations are recorded at the present value of minimum lease
payments.
Depreciation of plant and equipment is calculated on the straight-line
method over 22 to 40 years for buildings and improvements and 3 to 10 years for
equipment. Amortization of assets recorded under capitalized lease obligations
is recognized over the lesser of the useful lives or lease terms and such amount
is included in depreciation and amortization expense.
F-7
26
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Interest costs for the construction of certain long-term assets are
capitalized and amortized over the related asset's useful life. For the year
ended June 28, 1997, the Company capitalized interest costs of $133,000 related
to the construction of the Company's new headquarters facility and the expansion
of the manufacturing facility. Total interest incurred before the recognition of
the capitalized amount was $1,707,000 for fiscal 1997.
The Company constructs machinery and equipment to be used in the
manufacturing process. Costs capitalized include direct salaries and benefits of
personnel, and purchased material. For the years ended June 28, 1997 and June
29, 1996, respectively, approximately $293,000 and $257,000 of such costs were
capitalized and are included within property, plant and equipment.
Income Taxes
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards (SFAS) No. 109 "Accounting for Income Taxes." It
requires an asset and liability approach for financial accounting and reporting
for deferred income taxes. Taxes are recognized for all temporary differences
between the tax and financial reporting bases of the Company's assets and
liabilities based on the enacted tax laws and statutory tax rates applicable to
the periods in which differences are expected to affect taxable income.
Foreign Currency Translation
The assets and liabilities of the Company's foreign subsidiaries are
translated into U.S dollars at current exchange rates. Revenues, costs and
expenses are translated at the average exchange rates applicable for the period.
Translation adjustments resulting from changes in exchange rates are reported as
a separate component of stockholders' equity.
During the year ended June 29, 1996, management reevaluated the
appropriateness of continuing the designation of the U.S. dollar as Cannondale
Europe's functional currency. Due to significant changes in the economic facts
and circumstances of Cannondale Europe, it was determined that the Dutch guilder
most accurately portrays the economic results of Cannondale Europe. Accordingly,
effective March 31, 1996, the Company designated the Dutch guilder as the
functional currency of Cannondale Europe. At June 29, 1996, the assets and
liabilities of Cannondale Europe were translated at year-end exchange rates,
while revenues and expenses were translated at average rates of exchange in
effect during the three-month period ended June 29, 1996. Prior to the change in
Cannondale Europe's functional currency, remeasurement adjustments related to
its operations were included in net income. Subsequently, cumulative translation
adjustments relating to Cannondale Europe have been recorded as a separate
component of stockholders' equity.
Foreign Currency Forward Contracts
The Company enters into forward contracts to purchase and sell U.S.,
European, and Japanese currencies to reduce exposures to foreign currency risk.
The Company does not hold foreign currency forward contracts for trading
purposes. Gains and losses resulting from effective hedges of existing assets,
liabilities or firm commitments are deferred and recognized when the offsetting
gains and losses are recognized on the related transaction. Gains and losses on
foreign currency transactions that do not satisfy the accounting requirements of
an effective hedge are reported currently as other income or expense.
Stock-Based Compensation
The Company grants stock options to officers, directors, employees and
advisors with an exercise price determined by the Board of Directors at the time
of grant. The Company accounts for stock option grants, except for those granted
to advisors of the Company, in accordance with Accounting Principles Board
F-8
27
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Standard ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees,"
which requires that compensation expense be recognized for the difference
between the quoted market price of the stock at the grant date less the amount
that the employee is required to pay. As prescribed under SFAS No. 123,
"Accounting for Stock-Based Compensation," the Company has disclosed in Note 6,
the pro-forma effects on net income and earnings per share of recording
compensation expense for the fair value of stock options granted subsequent to
July 1, 1995. It is the opinion of management that the existing model to
estimate the fair value of employee options according to SFAS 123, and the
assumptions used to calculate the impact may not be representative of the
effects on future years and does not necessarily provide a reliable single
measure of the fair value of its employee stock options.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Reclassifications
Certain 1996 and 1995 amounts have been reclassified to conform to the
current year's presentation.
Earnings Per Share Amounts
Earnings per share of common stock are computed using the weighted average
number of shares of common stock and common stock equivalents outstanding for
each period. The weighted average number of shares of common stock used in the
computation of earnings per share was 8,916,321, 8,596,910, and 6,605,599 for
the years ended June 28, 1997, June 29, 1996 and July 1, 1995, respectively.
Common stock equivalents include warrants to purchase common stock and stock
options. For fiscal 1995, in computing the earnings per common share, dividends
applicable to Series A preferred stock decrease the earnings applicable to
common shares and common stock equivalents.
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings per Share," which is required to be adopted by the Company for
the period ended December 27, 1997. At that time, the Company will be required
to change the method currently used to compute earnings per share and to restate
all prior periods. Under the new requirements for calculating basic earnings per
share, the dilutive effect of stock options will be excluded. The impact is
expected to result in an increase in primary earnings per share of $.05, $.05
and $.06 per share for the years ended June 28, 1997, June 29, 1996 and July 1,
1995, respectively. The impact of SFAS No. 128 on the calculation of fully
diluted earnings per share is not expected to be material.
Intangible Assets
Included in other assets are intangible assets, which represent the cost of
patents, goodwill and deferred financing charges. Intangible assets were
$1,260,000 and $1,782,000 at June 28, 1997 and June 29, 1996, respectively.
Accumulated amortization on intangible assets amounted to $234,000 and $752,000
at June 28, 1997 and June 29, 1996, respectively. Amortization is provided using
the straight-line method over the estimated useful lives of the assets, not
exceeding 17 years.
Advertising Expenses
Advertising expenses are charged to income during the year that they are
incurred. Selling, general and administrative expenses of the Company include
advertising and promotion costs of $3,867,000, $2,780,000 and $2,464,000 for the
years ended June 28, 1997, June 29, 1996 and July 1, 1995, respectively
F-9
28
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. INVENTORY
The components of inventory are as follows (in thousands):
JUNE 28, JUNE 29,
1997 1996
-------- --------
Raw materials............................................ $ 13,394 $ 14,664
Work-in process.......................................... 1,455 1,772
Finished goods........................................... 16,325 15,505
-------- --------
31,174 31,941
Less reserve for obsolete inventory...................... (1,069) (1,415)
-------- --------
$ 30,105 $ 30,526
======== ========
3. PROPERTY, PLANT AND EQUIPMENT
The components of property, plant and equipment are as follows (in
thousands):
JUNE 28, JUNE 29,
1997 1996
-------- --------
Land................................................... $ 1,324 $ 1,252
Buildings and improvements............................. 8,700 10,070
Factory and office equipment........................... 24,388 21,804
Construction in progress............................... 6,493 889
-------- --------
40,905 34,015
Less accumulated depreciation and amortization......... (17,800) (15,488)
-------- --------
$ 23,105 $ 18,527
======== ========
Purchases of equipment through capitalized lease obligations and notes were
$28,000, $291,000, and $244,000 in fiscal 1997, 1996, and 1995, respectively.
4. DEBT
Short-term revolving credit advances (in thousands):
JUNE 28, JUNE 29,
1997 1996
-------- --------
Cannondale U.S............................................ $ -- $1,731
Cannondale Europe......................................... 193 1,931
Cannondale Japan.......................................... 829 1,094
------ ------
$1,022 $4,756
====== ======
In June 1997, Cannondale Europe entered into a new multicurrency credit
arrangement, which allows Cannondale Europe to borrow up to $10,000,000 on a
short-term basis. The interest rate on outstanding borrowings is a market rate,
applicable to the borrowed currencies, plus 1.5% with a minimum rate of 3.5%.
The credit arrangement contains no specific expiration date, and may be
terminated by either the borrower or the lender, at any time.
Cannondale Japan has an unsecured revolving credit facility for up to
155,000,000 Japanese yen (approximately $1,353,000 at June 28, 1997). The
interest rate on the outstanding borrowings was 2.875% at June 28, 1997 and June
29, 1996. The credit facility contains no specific expiration date, and may be
terminated by either the borrower or the lender, at any time.
F-10
29
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In March 1996, the Company entered into an unsecured multicurrency demand
credit facility with a maximum principal amount of $2,000,000. Borrowings under
the demand credit facility were made in U.S. dollars and Japanese yen
(190,000,000 yen at June 29, 1996). The interest rate on the outstanding demand
credit facility was LIBOR (London Interbank Offered Rate) plus 1/2%. LIBOR for
the Japanese yen borrowings was 0.563% at June 29, 1996.
In December 1995, Cannondale Europe entered into a financing agreement that
provided a base credit limit of 15,000,000 Dutch guilders (approximately
$8,776,000 at June 29, 1996) and a seasonal credit of an additional 10,000,000
Dutch guilders (approximately $5,851,000 at June 29, 1996) that was effective
from December 1 to June 1 each year. The credit facility was secured by
outstanding balances of eligible accounts receivable and inventory. The interest
rate on the outstanding revolving line of credit balance was 2.0% in excess of
the prime rate of DNB (De Nederlandsche Bank) with a minimum rate of 5.0% (the
prime rate was 2.5% at June 29, 1996). The credit facility extended for an
indefinite period of time, with either party having an option to terminate the
agreement at any time.
The weighted average interest rate on the Company's revolving lines of
credit was 4.48% and 4.60% at June 28, 1997 and June 29, 1996, respectively.
Long-Term Debt (in thousands):
JUNE JUNE
28, 29,
1997 1996
------- -------
Revolving credit facility................................ $17,278 $ --
Domestic revolving line of credit........................ -- 8,595
Domestic term loan....................................... -- 1,470
Pennsylvania Industrial Development Authority bonds,
interest rates ranging from 2.0% to 4.5%............... 1,605 1,755
Algemene Bank Nederland N.V. ............................ 937 1,184
Rush Township Construction Loan, interest at 3%.......... 422 453
Daiichi Kangyo Bank term loan, interest at 3.25%......... 290 455
Notes secured by equipment and capitalized leases........ 349 882
------- -------
20,881 14,794
Less current portion..................................... (562) (1,680)
------- -------
$20,319 $13,114
======= =======
In June 1997, the Company entered into an unsecured, multicurrency
revolving credit facility. The agreement, which extends to June 2000, allows the
Company and its subsidiaries to borrow up to $50,000,000. The agreement includes
a provision that permits the Company to borrow up to $7,500,000 on a short-term
basis (less than 30 days). At June 28, 1997 the outstanding borrowings consisted
of U.S. dollars ($6,413,000), Dutch guilders (17,000,000) and Japanese yen
(250,705,000). The agreement requires the maintenance of specified levels of
capitalization, interest coverage and tangible net worth.
The Company has the option to borrow at the following rates: (1) a variable
rate (8.50% at June 28, 1997) that is defined as the higher of the bank's prime
rate or the Federal Funds Rate plus 50.0 basis points; (2) a short-term market
rate (6.275% at June 28, 1997) that is an offered rate per annum quoted by the
bank; or (3) the LIBOR (3.25% and .56% for Dutch guilder and Japanese yen
borrowings at June 28, 1997, respectively) applicable to the currency borrowed
plus an interest rate margin ("LIBOR margin"). The LIBOR margin (ranging from
30.0 to 75.0 basis points) is determined quarterly based upon predetermined
performance criteria. The Company is obligated to pay a facility fee (ranging
from 15.0 to 25.0 basis points) on the balance of the facility based on the same
performance criteria as the LIBOR margin. At June 28, 1997, the LIBOR margin and
the facility fee were 42.5 basis points and 20.0 basis points, respectively. At
June 28,
F-11
30
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1997, the weighted average interest rate for borrowings under this facility was
4.54%. The Company used the proceeds to refinance the combined credit facility
described below.
In July 1993, the Company entered into a domestic financing agreement, as
amended, secured by virtually all tangible and intangible assets of the Company.
It provided for a multicurrency revolving line of credit ($3,525,000 and
8,665,000 Dutch guilders at June 29, 1996) and a term loan ("the combined credit
facility"). The combined credit facility, which extended through December 31,
1997, provided up to $35,000,000. The interest rate on the outstanding combined
credit facility was the prime rate with an option to borrow at LIBOR plus 1.50%
at June 29, 1996. LIBOR for the U.S. dollar and Dutch guilder borrowings was
5.457% and 2.75% on June 29, 1996. The prime rate on June 29, 1996 was 8.25%.
The Company was obligated to pay a line of credit fee of 25 basis points on the
unused revolving line of credit, and various prepayment fees if the facility was
to be terminated before December 31, 1996.
The Pennsylvania Industrial Development Authority bonds are secured by the
Company's Bedford, Pennsylvania facility. The loans extend through 2009, and are
payable in equal monthly payments.
The Algemene Bank of Nederland N.V. loan is secured by Cannondale Europe's
factory in Oldenzaal, Netherlands. The interest rate during 1996, was a fixed
rate of 10.25%, and as amended in October 1996, it is a variable market rate
determined quarterly with a maximum of 7.55%. The interest rate was 5.9% at June
28, 1997. The loan extends to May 2004 and is payable quarterly in Dutch
guilders with equal principal payments plus interest, and the balance of
1,100,000 Dutch guilders (approximately $562,000 at June 28, 1997) due at the
expiration of the agreement.
The Rush Township Construction Loan is secured by the Company's
Philipsburg, Pennsylvania facility. The loan extends through 2003, and is
payable in equal monthly installments.
The Daiichi Kangyo Bank term loan is unsecured. The loan extends through
1999, and is payable in quarterly installments.
Capitalized lease obligations extend through 2000, and represent the
present value of future minimum lease payments, discounted at rates ranging from
7.5% to 9.54%, payable in monthly installments.
Maturities of long-term debt, including payments under capitalized lease
obligations are as follows (in thousands):
1998............................................................. $ 578
1999............................................................. 515
2000............................................................. 17,607
2001............................................................. 289
2002............................................................. 279
Thereafter....................................................... 1,631
-------
20,899
Amounts representing interest on capital lease obligations....... (18)
-------
$20,881
=======
Subordinated Debt
In June 1992, the Company issued $10,000,000 of 8% subordinated notes due
June 1997 and warrants, exercisable at $.01 per share at the sole option of the
holders, into 341,821 shares (increased to 507,113 shares on July 2, 1994 -- see
Note 8) of the Company's common stock in exchange for $10,000,000. The warrants
to purchase the 341,821 shares were valued at $1,964,000 at their date of
issuance. The corresponding original debt amount of $8,036,000 was increased
through charges to interest expense based on the interest method to yield
approximately 11.5% to its face amount through maturity. Interest at 8%,
commencing from June 3,
F-12
31
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1993, was payable semi-annually in arrears. In November 1994, the subordinated
debt with a carrying amount of $9,273,000 was retired in conjunction with the
initial public offering. This early retirement of debt resulted in an
extraordinary charge of $1,141,000, comprised of the unamortized discount and
related deferred charges, net of an income tax benefit of $456,000.
5. INCOME TAXES
Income before income taxes and extraordinary item by geographic location is
as follows (in thousands):
YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 28, JUNE 29, JULY 1,
1997 1996 1995
---------- ---------- ----------
United States............................ $ 7,770 $ 5,925 $ 5,072
Foreign.................................. 13,378 10,023 4,514
-------- -------- --------
$ 21,148 $ 15,948 $ 9,586
======== ======== ========
The income tax provision consists of the following (in thousands):
YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 28, JUNE 29, JULY 1,
1997 1996 1995
---------- ---------- ----------
Current:
Federal................................ $2,884 $2,281 $ 1,052
Foreign................................ 4,698 3,551 1,162
State.................................. 502 586 500
------ ------ --------
Total Current.................. 8,084 6,418 2,714
------ ------ --------
Deferred:
Federal................................ (408) (384) (1,590)
Foreign................................ 36 (189) 422
State.................................. (70) (43) (193)
------ ------ --------
Total Deferred...................... (442) (616) (1,361)
------ ------ --------
Total.......................... $7,642 $5,802 $ 1,353
====== ====== ========
The provision for income taxes on income before income taxes and
extraordinary item differs from the amount computed by applying the U.S. federal
income tax rate (34%) because of the effects of the following items:
YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 28, JUNE 29, JULY 1,
1997 1996 1995
---------- ---------- ----------
Tax at U.S. statutory rate............... 34.0% 34.0% 34.0%
State income taxes, net of federal
benefit................................ 1.6 2.4 2.9
Higher effective income taxes of other
countries.............................. 0.9 1.6 6.6
Change in valuation allowance of deferred
tax assets............................. -- (1.5) (31.6)
Other.................................... (0.4) (0.1) 2.2
---- ---- -----
36.1% 36.4% 14.1%
==== ==== =====
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The
F-13
32
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
significant components of the Company's deferred tax assets and liabilities at
June 28, 1997 and June 29, 1996 are as follows (in thousands):
JUNE 28, JUNE 29,
1997 1996
-------- --------
Deferred tax assets:
Accounts receivable and inventory reserves............. $1,549 $ 1,224
Stock option compensation.............................. 371 583
Accrued liabilities.................................... 845 939
Other.................................................. 394 266
------ --------
Total deferred assets.................................. 3,159 3,012
------ --------
Deferred tax liabilities:
Tax over book depreciation............................. (658) (771)
Other.................................................. (217) (435)
------ --------
Total deferred liabilities............................. (875) (1,206)
------ --------
Net deferred tax assets.................................. $2,284 $ 1,806
====== ========
SFAS No. 109 generally provides that net deferred tax assets are not
recognized when a company has cumulative losses in recent years. Accordingly, a
valuation allowance was established in prior years for the excess of deferred
tax assets over deferred tax liabilities. For the fiscal year ended June 29,
1996, the Company reduced its valuation allowance by $232,000 due to the
reevaluation of the recoverability of deferred tax assets.
The Company has not provided for possible U.S. taxes of approximately
$888,000 on the undistributed earnings of foreign subsidiaries ($16,413,000) at
June 28, 1997 that are considered to be reinvested indefinitely.
6. STOCK OPTIONS
At June 28, 1997, the Company has four fixed option plans, which are
described below. The Company applies APB Opinion 25 and related Interpretations
in accounting for its employee stock option plans. Under APB 25, the Company
does not recognize compensation expense since the exercise price of the options
granted is equal to the market value of the Company's common stock on the date
of grant.
SFAS No. 123 requires that the Company disclose the pro-forma impact on net
income and earnings per share as if compensation expense associated with
employee stock options had been calculated under the fair value method for
employee stock options granted subsequent to July 1, 1995. The fair value for
these options was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions for the years
ended June 28, 1997 and June 29, 1996: an expected volatility of .45 and .50, an
expected term 4.66 and 4.09 years, risk-free interest rates of 6.05% and 5.89%
and no expected dividend yield.
For purposes of pro-forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro-forma information is as follows (in thousands, except per share data):
YEAR ENDED YEAR ENDED
JUNE 28, JUNE 29,
1997 1996
------------- -------------
Pro Forma Net Income............................... $11,986 $ 9,399
Pro Forma Primary-Earnings Per Share............... $ 1.38 $ 1.14
Pro Forma Fully-Diluted Earnings Per Share......... $ 1.38 $ 1.14
F-14
33
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The SFAS No. 123 pro-forma effect will be not be fully reflected until
2001.
The Company has four fixed option plans: the 1994 Stock Option Plan (the
"1994 Plan"), the 1994 Management Stock Option Plan (the "Management Plan"), the
1995 Stock Option Plan (the "1995 Plan") and the 1996 Stock Option Plan (the
"1996 Plan"). Under the terms of the plans, the Committee administering the
plans may grant options to purchase shares of the Company's common stock to
officers, directors, employees and advisors for up to 1,947,500 shares. The
vesting of options granted under the plans is at the discretion of the Board of
Directors. Other than options granted under the 1994 Plan to purchase 373,743
shares of common stock at an exercise price of $.34, substantially all of which
vested on July 2, 1994, and options granted to new non-employee directors (1,000
on the date of election or appointment), which vest immediately, options vest
over a three to five year period. Under the plans, the Company may, at its
discretion, repurchase the stock at the time of termination of service of an
employee at fair market value. The 1994 Plan, the Management Plan, the 1995 Plan
and the 1996 Plan terminate December 31, 2003, December 31, 2004, December 31,
2005 and December 31, 2006, respectively.
A summary of the status of the Company's stock option plans as of June 28,
1997, June 29, 1996 and July 1, 1995, and changes during the years ending on
those dates is presented below:
1997 1996 1995
---------------------- ---------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- --------- -------- ------- --------
Outstanding at beginning of
year...................... 1,035,495 $11.71 641,605 $ 6.34 373,743 $ 0.34
Granted..................... 454,196 $19.21 543,769 $15.79 330,674 $12.96
Exercised................... (75,900) $ 7.44 (117,868) $ 0.85 (29,462) $ 0.34
Terminated.................. (60,587) $16.45 (32,011) $13.37 (33,350) $ 9.98
--------- ------ --------- ------ ------- ------
Outstanding at end of
year...................... 1,353,204 $14.25 1,035,495 $11.71 641,605 $ 6.34
========= ====== ========= ====== ======= ======
Options exercisable at end
of year................... 509,756 $ 9.20 318,231 $ 4.33 336,531 $ 0.34
Weighted average fair value
of options granted during
the year.................. $8.51 $7.27 $--
The following table summarizes information about fixed stock options
outstanding at June 28, 1997.
OPTIONS EXERCISABLE
OPTIONS OUTSTANDING ----------------------------------
--------------------------------------------------------- NUMBER OF
NUMBER OF OPTIONS WEIGHTED-AVERAGE WEIGHTED- OPTIONS WEIGHTED-
RANGE OF EXERCISE OUTSTANDING AT REMAINING AVERAGE EXERCISE EXERCISABLE AT AVERAGE EXERCISE
PRICES JUNE 28, 1997 CONTRACTUAL LIFE PRICE JUNE 28, 1997 PRICE
- ------------------- ----------------- ---------------- ---------------- -------------- ----------------
$ 0.34 to $ 0.34... 186,338 6.94 $ 0.34 186,338 $ 0.34
$12.50 to $15.00... 423,315 7.76 13.72 226,394 13.44
$15.25 to $18.75... 656,701 9.06 17.59 97,024 16.35
$19.75 to $22.63... 86,850 9.37 21.47 -- --
--------- ---- ------ ------- ------
$ 0.34 to $22.63... 1,353,204 8.38 $14.25 509,756 $ 9.20
========= =======
7. PROFIT SHARING PLAN
The Company has a qualified, defined contribution savings plan covering all
full-time U.S. employees who have attained the age of 18 with more than three
months of service. Contributions to the plan, which are
F-15
34
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
discretionary, are determined annually by the Board of Directors. There were no
contributions in fiscal 1997, 1996 or 1995.
8. STOCKHOLDERS' EQUITY
In June 1992, the Company issued warrants, with antidilutive provisions, to
purchase 341,821 shares at $.01 per share, subject to future adjustments, of the
Company's common stock in connection with a borrowing from three limited
partnerships managed by Morgan Stanley & Co. The holders of the warrants were
entitled to exercise the warrants in whole or in part at any time after 10 days
prior written notice to the Company up to June 3, 1997, the expiration date. On
July 2, 1993, warrants to purchase 130,618 shares of the Company's common stock,
with terms identical to the above warrants, were issued as additional
consideration in connection with the borrowings. The value of such additional
warrants (approximately $540,000) was credited to additional paid-in capital and
included in other assets, and was charged to interest expense over the remaining
term of the related borrowing. The number of common shares for which such
warrants were exercisable, including the effects of the antidilutive provisions
resulting from the granting of stock options during fiscal 1994, increased to
507,113 on July 2, 1994. Of this amount, 506,722 were exercised in conjunction
with the initial public offering and the balance was surrendered in payment of
the exercise price.
On July 2, 1993, the Company entered into an agreement with Morgan Stanley
& Co. to exchange four short-term notes for 6,718 shares of Series A redeemable
convertible preferred stock and warrants, with antidilutive protection, to
purchase an aggregate of 330,708 shares of common stock of the Company at $.01
per share. The number of common shares for which the warrants were exercisable,
including the effects of the antidilutive provisions resulting from the granting
of stock options during fiscal 1994, increased to 451,887. Of this amount,
451,539 were exercised in conjunction with the initial public offering and the
balance was surrendered in payment of the exercise price.
During August 1994, the Company increased its authorized shares to
2,000,000 (from 20,000) and 18,000,000 (from 1,000,000) for preferred and common
stock, respectively.
The holders of the Series A Preferred Stock were entitled to cumulative
quarterly dividends (payable as declared) at the annual rate of $150 per share
and a liquidation preference over holders of common stock of $1,000 per share
plus accumulated dividends. Accumulated dividends in the amount of $1,408,000
were paid to the holders of Series A preferred stock in conjunction with the
initial public offering. Additionally, such shares, which contained voting
rights, as defined, were convertible, at the option of the holder, into shares
of the Company's common stock at fair market value at the date of conversion.
The Company redeemed the Series A Preferred Stock, at the liquidation preference
amount described above, with the proceeds from the initial public offering of
common stock.
In September 1994, the Company adopted an Employee Stock Purchase Plan (the
"Purchase Plan"), which is intended to allow qualified employees to purchase
common stock of the Company at a discount to the market value of such common
stock. A total of 348,750 shares of Common Stock have been reserved for issuance
under the Purchase Plan. As of June 28, 1997, no shares were issued under the
Purchase Plan.
In November 1994, the Company sold 2,300,000 shares of common stock through
a public offering at a price of $13.00 per share. The net proceeds of
approximately $26.8 million, after deducting the underwriters' discount and
offering expenses, were used to retire $10,000,000 of subordinated debt, to pay
$380,000 of accrued interest on the subordinated debt, and to redeem all 6,718
shares outstanding of the Series A redeemable convertible preferred stock,
including the payment of accumulated dividends on such stock, for $8,126,000.
The balance of the proceeds was used to reduce outstanding borrowings under the
Company's domestic line of credit. Had the offering occurred on July 3, 1994,
primary earnings per share for the year ended July 1, 1995 would have been
$1.07.
F-16
35
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In September 1995, the Company completed a public offering of 1,300,000
shares of common stock at a price of $17.25 per share. The net proceeds were
approximately $21.0 million after deducting the underwriting discount and
offering expenses. Additionally, in October 1995, the Company issued 66,666
shares of common stock, upon the partial exercise of the over-allotment option
granted to the underwriters in connection with the September 1995 public
offering. The net proceeds to the Company from the additional shares issued, at
the public offering price of $17.25 per share, were approximately $1.1 million
after deducting the underwriting discount and expenses. The net proceeds of the
offering were used to reduce outstanding borrowings under the Company's domestic
revolving credit facility. Had the offering occurred on July 2, 1995, primary
earnings per share for the year ended June 29, 1996 would have been $1.17.
At June 28, 1997, there were 2,073,020 shares of common stock reserved for
the exercise of options and employee stock purchases.
9. OPERATING LEASES
The Company and its subsidiaries lease software, computer, and other office
and factory equipment under long-term operating leases with varying terms. The
aggregate future minimum lease payments under noncancellable operating leases
with initial or remaining lease terms of greater than one year are as follows
(in thousands):
1998................................................ $1,558
1999................................................ 1,129
2000................................................ 429
2001................................................ 193
2002 and after...................................... --
------
$3,309
======
Rent expense amounted to $2,273,000, $1,203,000 and $1,023,000 in 1997,
1996 and 1995, respectively.
10. FOREIGN EXCHANGE RISK MANAGEMENT
At June 28, 1997 and June 29, 1996, the Company had approximately $7.7
million and $5.9 million, respectively, of forward exchange contracts
outstanding to exchange European, Japanese and U.S. currencies to reduce
exposures to foreign currency risk. The Company enters into forward foreign
currency contracts for a significant portion of its current and net balance
sheet exposures, principally relating to trade receivables and payables
denominated in foreign currencies, and firm sale and purchase commitments. The
forward exchange contracts generally have maturities that do not exceed 12
months and require the Company to exchange, at maturity, various currencies for
U.S. dollars, Dutch guilders and Japanese yen at rates agreed to at inception of
the contracts. At June 28, 1997, the net loss explicitly deferred from hedging
firm sale and purchase commitments was not significant and will be recognized in
earnings during fiscal 1998. Deferred gains and losses are included in prepaid
expenses and other current assets, and are recognized in earnings when the
future sales and purchases occur.
The Company's credit risk in these transactions is the cost of replacing
these contracts, at current market rates, in the event of default by a
counterparty, which is typically a major international financial institution.
Additionally, market risk exists during the period between the date of the
contract and its designation as an effective hedge for financial reporting
purposes. The Company believes that its exposure to credit risk and market risk
in these transactions is not significant in relation to earnings.
At June 28, 1997, the Company had outstanding borrowings of 251 million
Japanese yen (approximately $2,191,000 at June 28, 1997) and 17 million Dutch
guilders (approximately $8,674,000 at June 28, 1997) to
F-17
36
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
hedge the Company's net investments in its foreign subsidiaries. Gains and
losses on hedges of net investments are recognized in a separate component of
stockholders' equity.
11. OTHER INCOME
For the years ended June 28, 1997, June 29, 1996 and July 1, 1995, net
foreign currency gains and (losses) included in other income aggregated
approximately $33,000, ($138,000) and ($271,000), respectively. The balance
consists principally of finance charges related to accounts receivable.
12. FINANCIAL INSTRUMENTS
On June 28, 1997, the carrying value of financial instruments such as cash,
trade receivables and payables approximated their fair values, based on the
short-term maturities of these instruments. The carrying amounts of the
Company's borrowings under its variable rate short- and long-term credit
agreements approximate their fair value. The carrying value of the Company's
other long-term debt, which approximates its fair value, is estimated based on
expected future cash flows, discounted at current rates for the same or similar
issues. The carrying value of the Company's foreign currency forward contracts,
which approximates their fair value, is the amount at which the contracts could
be settled based on quotes provided by major financial institutions.
13. GEOGRAPHIC DATA
Summarized data by geographic area are as follows (in thousands):
YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 28, JUNE 29, JULY 1,
1997 1996 1995
------------- ------------- ------------
Net Sales:
United States............................... $ 115,931 $ 106,035 $ 88,888
Europe and Other............................ 90,884 78,449 64,791
Intercompany................................ (44,319) (38,508) (31,598)
--------- --------- --------
$ 162,496 $ 145,976 $122,081
========= ========= ========
Operating Income:
United States............................... $ 8,337 $ 6,650 $ 7,688
Europe and Other............................ 13,876 11,199 5,563
Intercompany................................ (334) (91) 240
--------- --------- --------
$ 21,879 $ 17,758 $ 13,491
========= ========= ========
Identifiable Assets:
United States............................... $ 107,754 $ 93,627 $ 70,918
Europe and Other............................ 40,959 30,090 21,760
Intercompany................................ (21,429) (13,772) (8,670)
--------- --------- --------
$ 127,284 $ 109,945 $ 84,008
========= ========= ========
Included in "Europe and Other" are data for geographic areas other than
Europe which, in the aggregate, are not material.
At June 28, 1997, the net assets of Cannondale Europe, Cannondale Japan and
Cannondale Australia were $13,324,000, $1,415,000 and $704,000, respectively.
F-18
37
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. RELATED PARTY TRANSACTIONS
During 1997, the Company began construction of a new headquarters facility
and expansion of its manufacturing facility. The Company contracted an entity
controlled by a director of the Company to act as the general contractor for the
construction of both projects. As of June 28, 1997, the Company has paid the
entity approximately $4.4 million for the construction of both facilities, and
is obligated to pay the entity approximately $4.9 million more for the
completion of the facilities.
In connection with the construction of the new headquarters facility, the
Company sold the existing headquarters to an entity controlled by the Company's
Chairman, President and Chief Executive Officer and another director of the
Company for $1,676,000, an amount which approximated the net book value and fair
value of the existing headquarters facility at the date of sale. Pending the
Company's relocation to the new headquarters facility, the Company will continue
to occupy the current facility on a month-to-month net lease of $16,000 per
month.
15. SUBSEQUENT EVENT
In September 1997, the Company's Board of Directors authorized the
repurchase by the Company of up to 1,000,000 shares of its common stock at an
aggregate market price not to exceed $20 million. Purchases by the Company may
be made from time to time in the open market or in private transactions. The
repurchase program may be suspended or discontinued at any time. Shares
repurchased by the Company will be available for general corporate purposes,
including the issuance upon exercise of stock options.
In order to accommodate the capital requirements of the repurchase program,
in September 1997, the Company and the lender have agreed to amend the Company's
revolving credit facility to allow the Company and its subsidiaries to borrow up
to $70,000,000. The proposed amendment to the revolving credit facility includes
adjustments to specified levels of tangible net worth and cash flow levels that
the Company must maintain.
F-19
38
REPORT OF INDEPENDENT AUDITORS ON FINANCIAL STATEMENT SCHEDULE
The Board of Directors and Stockholders
Cannondale Corporation and Subsidiaries
We have audited the consolidated financial statements of Cannondale
Corporation as of June 28, 1997 and June 29, 1996, and for the years ended June
28, 1997, June 29, 1996 and July 1, 1995, and have issued our report thereon
dated August 11, 1997 (included elsewhere in this Annual Report). Our audits
also included the financial statement schedule listed in Item 14(a)(2) of this
Annual Report. This schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Stamford, Connecticut
August 11, 1997
39
SCHEDULE II
CANNONDALE CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
ADDITIONS
--------------------------------------------------
BALANCE AT CHARGED TO CHARGED BALANCE
BEGINNING COSTS AND TO OTHER AT END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
- ------------------------------------------ ----------- ---------- ---------- ---------- ---------
ALLOWANCE FOR DOUBTFUL ACCOUNTS, RETURNS,
DISCOUNTS AND LATE CHARGES
Year ended July 1, 1995................. $ 2,639 $4,244 $ 3 $ (3,193)(1) $ 3,693
======= ====== ==== ======== =======
Year ended June 29, 1996................ $ 3,693 $9,944 $ 45 $ (8,444)(1) $ 5,238
======= ====== ==== ======== =======
Year ended June 28, 1997................ $ 5,238 $5,545 $(34) $ (4,317)(1) $ 6,432
======= ====== ==== ======== =======
RESERVE FOR OBSOLETE INVENTORY
Year ended July 1, 1995................. $ 803 $ 912 $ 9 $ (468)(2) $ 1,256
======= ====== ==== ======== =======
Year ended June 29, 1996................ $ 1,256 $ 977 $ 11 $ (829)(2) $ 1,415
======= ====== ==== ======== =======
Year ended June 28, 1997................ $ 1,415 $1,484 $(43) $ (1,787)(2) $ 1,069
======= ====== ==== ======== =======
- ---------------
(1) Discounts, late charges and uncollectible accounts written off, net of
recoveries.
(2) Inventory disposed.
40
EXHIBIT INDEX
Sequentially
Exhibit Numbered
Number Description Page
- ------ ----------- ------------
10.1.8 -- $50,000,000 Credit Agreement dated as of June 9, 1997
among the Company, certain subsidiaries of the
Company and NationsBank, N.A. as Administrative Agent,
Fronting Bank and Swingline Bank and ABN Amro
Bank N.V., New York Branch, as Documentation Agent
and Syndication Agent.
10.1.9 -- $10,000,000 Umbrella Arrangement Agreement dated
May 28, 1997 between Cannondale Europe, B.V.
11 -- Computation of Earnings Per Share.
21 -- Subsidiaries of the Registrant.
23 -- Consent of Independent Auditors.
27 -- Financial Data Schedule.